Wow!! What a week it was in not only interest rate markets, but obviously in the equity markets.
The 10 year treasury opened the week in the 2.70% area and moved steadily higher all week until closing at 2.85%. Overall not a huge move, but the nervous Nellies dumped stocks and bonds helter skelter. The GDP report and the employment report both had wage inflation components that were running “hotter” than expected.
In addition to the higher wages in the various reports the FED finally got the balance sheet “runoff” underway in noticeable volumes as they let $20 billion of maturities move to cash (or maybe it is just vapor since they created dollars to buy the securities originally). Regardless it is not being reinvested. We have heard some analysts comment that there will be plenty of demand to make up for the “runoff”—we have to call BS on that thinking. The runoff started at $10 billion/month and is to move $10 billion/month higher each quarter so now we are starting the 2nd quarter and the runoff is scheduled to be $20 billion/month until April when it will move to $30 billion/month. By the end of the year the runoff is supposed to be $50 billion/month. If there is a belief that the Fed can runoff $50 billion a month, while the treasury runs deficits of $65 billion/month AND the European Union cuts their QE to nothing from $30 billion/month someone should wake up. NOT GOING TO HAPPEN. The Fed can raise rates OR they can run off the balance sheet, but later in the year they will not be able to do both unless they are dead set on a recession (this is our prediction).
Last week we only had one new issue being sold and it is yet to trade, although we see that eTrade has it set up in their database so we should see trading begin Monday or Tuesday.
Fidus Investment (NASDAQ:FDUS) sold a baby bond issue of 5.875% notes with a maturity date of 2/1/2023. The issue is a relatively small one with 1,700,000 $25 shares being sold. Fidus is a small BDC (business development company) with solid financials and while we like the company we would only be a buyer with a current yield of at least 6.25%-6.50%. The issue is not yet trading, but when it opens up I would think it likely it will NOT trade above $25 anytime soon since rates have popped since the announcement. The attraction here would be the relatively short maturity date. We shall see how this develops.
New issues sold the previous week, which are now trading on the NYSE, were Jernigan Capital (NYSE:JCAP) 7% cumulative redeemable preferred and while down it was not bad–
The Costamare Inc. (NYSE:CMRE) new 8.875% preferred issue held up very well which demonstrates the resiliency of the high yield issues.
The average $25/share preferred stock issue fell by a relatively massive 49 cents/share to close at $24.96. It has been a long time since we have seen an average loss of this size.
Of the 442 preferreds we follow 219 are trading under $25 which is sharply higher than the previous 162 we reported last week.
Our new Enhanced High Yield Model Portfolio , which we have just begun to build and currently contains only 2 issues, lost a bit of value which is no surprise as this portfolio will contain many perpetual preferreds. While both high yield and fixed to floating rate preferreds will fall less than low and mid coupon issues they will still fall when interest rates rise. Our goal for the week is to get 2 more issues purchased for the model.
The week is a fairly quiet economic announcement week with the biggest events likely to be the 6 different speeches the various FED governors will be giving. There have been times when these speeches move markets more than important data.
Our market expectations for next week (which may be wildly wrong) is that both interest rates and equity prices will stabilize starting mid day Monday. The balance of the week will be some give and take (up and down gyrations), with income securities gaining a bit as investors calm down a bit and become rational (it is our opinion that less seasoned income investors tend to buy high and sell low during these drops–then they refuse to get back in until prices rise when they buy).
Our watch list for the week focuses on issues that may fit well to the Enhanced High Yield Portfolio. This would included high yield fixed rate or fixed to floating rate preferreds or baby bonds. Additionally some of the retail related REITs are close to having current yields that are attractive. This would include KIMCO (NYSE:KIM) which sports a 7.53% current yield or Whitestone REIT (NYSE:WSR) which is a smaller REIT which now has a 9% current yield.